Remember the time when we left orders with our broker in the morning and received a confirmation fax late in the evening? We wondered whether we had acquired the shares at the best possible price for the day. Today, the picture is different. We can log on to our broker’s site and get live NSE quotes and place buy and sell orders on the spot, and direct the site to debit the requisite amount from our savings accounts. A few seconds later, you get the confirmation on your screen. And after the trade settlement, your bank and DP accounts will reflect the changes accordingly.

The speed of transaction, confidentiality about the prices and ease of settlement in the paperless mode should be good reasons for retail investors to jump on to the Net. All they need is a PC, a modem, a subscription to an ISP, an account with a bank (which has a web presence) and a depository account. And they can choose from a plethora of e-trading web sites.

The Net trading facility is a win-win proposition for both investors and brokers. Says Dhiraj Agarwal, chief executive officer, Sharekhan.com, “It’s transparent and convenient from the common investor’s perspective. It is also advantageous from the brokers’ point of view as they can service a large number of customers without actually increasing their own running cost.” The response so far is mind-boggling.

Vikas Gupta, 32, can’t stop singing the praises of e-trading. He traded only once a week earlier, but now he trades a ‘few times’ every day. He also spends hours studying companies on the Net. Vikas is not alone. Net broking is finally coming of age, and thousands of small investors are excitedly logging on to e-broking sites.

Today, there are about 1.6 million Net users in the country (as per Nasscom) and the number will swell to over 5 million in the next three years. Says Kapil Sanghi, managing director, equitytrade.com, “The registrations on our site saw an exponential growth initially. We expect a phenomenal rise in upcountry investors”.

Though Internet trading constitutes less than 1% of the daily off-line trades today, there is a consensus among Net brokers that it will pick up very fast once infrastructural hassles are taken care of. Internet trades should constitute 10-15% of the overall trades in the next one year.

Will Net trading eventually eclipse and cause a demise of off-line broking? In the US, companies like Merrill Lynch, which had only a brick and mortar presence, had to quickly move to Net trading. However, a majority in the broking community feels that brick and click brokerage services will co-exist. Says Motilal Oswal, managing director, Motilal Oswal Securities, “Traditional brokers will have to re-focus on their business model. I don’t think money will be made only by Net brokers. It has to be a brick-and-click structure. It’s only a channel but if a traditional broker does not embrace technology, he will be left behind.” Adds Pallav Sinha, chief executive (retail services), J M Morgan Stanley, “There is place for both. The trick is in offering a range of on-line and off-line services, and easy customer access.”

Besides, off-line brokers have, over the years, built the brick and mortar infrastructure that a pure Net broker can never hope to replicate. No wonder, all the Indian Net brokers who count today are traditional brokerages.

With over 20 trading sites available today, security, low cost and services will hold the key to attracting investors. The seamlessness of all the intermediaries is a prerequisite to lure investors. Says Kapil Sanghi, managing director, equitytrade.com, “Quite a few sites advertised their web trading portal well ahead of the actual launch. They attracted a large clientele. Later, this proved to be only a marketing gimmick as ads and superlow brokerage lured clients. Soon investors realised that these sites had nothing special to offer.”

No doubt, the cost of transacton (brokerage) is becoming competitive. However, it is post-trading services that will have a significant impact in holding on to clients. Says Shankar Sharma, director, First Global, “We can penetrate roughly 7000 clients in the next 1-2 months, which will ensure large volumes for us. But, at the same time, we are very cautious about services as ultimately quality of business matters. In the future, we won’t be looking only at the number of accounts.”

Thus, an investor should not look only at the brokerage aspect. One has to see whether the super low brokerage slabs can deliver the desired level of services. The issue is seamlessness of services at a minimum cost. Says Manoj Vaish, chief executive officer (derivatives), BSE, “There will be consolidation of many of the brokers. The future name of the game will be value-added services. Financial services are slowly becoming more technology-intensive and there is no escape from it.”

Rather than enter into senseless ‘discount’ wars, many portals are offering benefits like margin trading that will provide value for money.

Margin trading its basically a facility offered to investors to leverage their capital so that they can trade above the deposited amounts. With Net trading, margin trading could see an exponential growth. For instance, Kotakstreet.com is one site which offers margin trading with few exclusive features. Says D Kanan, vice president, Kotakstreet.com. “If you are our client and have Rs 50,000 deposited as margin, clearly you can trade up to Rs1,50,000 (margins 33%). But if you sell some stock first, say, worth Rs1,50,000, then we will also consider that in your margins, raising your total margin to Rs 2,00,000. Thus, your fresh limit for trading will be Rs 6,00,000.” Clearly, margin trading will be one of the most lucrative and exciting instruments which will balloon as e-trading takes of.

However, margin trading is a risky exercise as investors tend to see only the upside potential, without considering the downside. Though margin trading already forms a significant proportion of overall trading today, traditional brokers who are offering this facility are familiar with their clients, blunting the fear of default.

On the flip side, there are a few Net brokers who do not even take margins to reduce the cost to customers. Says Satish Menon, senior vice president, Geojit Securities, “We don’t retain the upfront margin from our client but use the on-line fund transfer facility. Thus clients don’t have to block their funds till they initiate trade.” For a first time user like Ankit Lahri, 21 , this is a fantastic experience. He wanted to purchase 100 shaes of Reliance Industries at Rs 400 per share. As soon as he placed his order on the Net, the order went to the back office system of the site to confirm margins.

A moment later, there was a display on Ankit’s screen saying there was no balance margin with the brokerage firm. But the site asked him whether he wanted to transfer or deposit funds (Rs 40,000X 0.30 = Rs 12,000, say 30% margin) through his bank account.

As soon as Ankit clicked ‘yes’, he reached the bank’s window on its web site, where he could view the current status of his account. And, automatically, his account got debited by a pre-calculated amount (because of the interface with the broker’s site) and credited to the broker’s account. This fund transfer confirmation was launched on the broker’s site and updation was done instantly to further activate and execute the order. The entire process tooks less than 6 seconds.

To reach this level of seamlessness, it is essential for the broker’s site to have an interface with the concerned bank’s web site. Says S Rengrajan, COO, Investsmart.com, “E-trading will move slightly towards e-investment. More and more banks will e-enable themselves and with that, all the three parties — the bank, the broker and the depository participant — will have seamlessness in their operations which is a prerequisite for the success of e-trading in the country.”

But, today, there are only a few banks offering Net baking. HDFC Bank, ICICI Bank, Global Trust Bank and now CitiBank are among the few.

Banks, too, are not flexible with their customers. To become an ICICI web trade customer, it is mandatory to hold an ICICI bank account and also its depository account. There are two reasons for this. First, banks have strict systems before they can put a trade through and, therefore, are more comfortable when all the related transactions are within their control. Second, and more important, it makes a better revenue model. In the case of ICICI, three birds are hit with one stone. It gets money from its customer for its banking service, depository service and finally its broking service. Says Anup Bagchi, chief operating officer, ICICIDirect.com, “Net trading is going to flourish, because, in India, unlike other countries, we have a long 125 years of an equity cult.”

A concern voiced about Net trading is that it will encourage speculation and day trading. But if we see the daily turnover in the Indian markets today, delivery-based trading is very less compared to squaring up of transactions. Thus, Internet trading per se will not be responsible for speculative trading. In fact, a certain amount of speculation and day trading will ultimately benefit the market with more liquidity. Says Amit Rathi, director, Anand Rathi Securities, “Net trading doesn’t really change the fundamental nature of the equity markets. Greed and fear have ruled the markets for decades and Net trading will not change that or exaggerate that to any significant extent. In fact, through real-time information dissemination, it may bring price adjustments more quickly, making the markets a little more efficient.”

Today, NSE is the only exchange facilitating Internet trading. It offers an order-routing facility – NSE XS – and a product for Net trading – NEAT iXS – that enables brokers to provide Net trading facilities to investors. Recently, NSE.IT enhanced its product basket by adding another product, ProBos, a broker’s back office product, which will also support e-broking solutions.

The Bombay Stock Exchange (BSE) is expected to offer Net trading connectivity any time now. Says Manoj Vaish, 38, CEO (derivatives segment), BSE, “The centralised trading infrastructure aims at providing a world-class cutting edge trading solution which is highly available, highly scalable, safe and secure and capable of delivering high class content and adapting to multiple products/multi-mode delivery mechanisms.”

For all the hype, Net brokers think that India will never see the kind of Net trading as seen in Korea (where over 60% of the trades take place through the Net). The number of active clients who actually trade on a regular basis and keep their accounts alive is still meagre. This is because brokers are concentrating on a few, high networth clients. One possible reason is that line interface with banks has to be developed. Dependence on a single bank entails a relatively higher risk for the broker. One should consider the cultural and social issues and, above all, the Indian psyche. Most Indian investors will love to adopt a simultaneous route for trading, ie, trading on the Net and holding the broker on the ear (telephone).

Nonetheless, the convergence era is here and doing business through the Internet is slowly becoming inevitable. The government seems quite committed as the IT Act is now a reality. E-transactions and digital signatures will have legal status now.

It is the nature of any business to see a lot of players entering the market at the zero hour to take early entrant advantage. So, how can Net broking be an exception? Today, a lot of companies are jumping onto the bandwagon, irrespective of whether they have a prior experience in the brokerage line or not. They take this as a pure Internet business or as a part of the e-commerce venture of B2C nature. But over time, investors will recognise the strength and weaknesses of such companies and clearly the brick and mortar experience of traditional brokerage firms will become distinct. Says Rathi, “Broking at the end of the day is becoming a commodity. Execution is a commodity. How will you differentiate yourself besides the brands? How many financial products are you going to offer? Value added services are going to be the differentiating factor.”